Is Long-Term Care Insurance Tax Deductible for an S Corp?
Unpack the tax treatment of long-term care insurance premiums for S corporation stakeholders. Learn about deductibility and reporting nuances.
Unpack the tax treatment of long-term care insurance premiums for S corporation stakeholders. Learn about deductibility and reporting nuances.
S corporations offer the liability protection of a corporation and the pass-through taxation benefits of a partnership. Many small business owners choose this entity for its operational flexibility and potential tax advantages. Long-term care insurance is a key consideration for financial planning. It covers costs for services such as assistance with daily activities, which can be provided in various settings including at home or in a nursing facility.
For long-term care insurance premiums to receive any favorable tax treatment, the policy must be a “qualified long-term care insurance contract” as defined by Internal Revenue Code Section 7702B. A policy must be guaranteed renewable, meaning the insurer cannot unilaterally cancel it or refuse to renew it, except for nonpayment of premiums.
The contract must also not have a cash surrender value or provide for distributions other than for qualified long-term care services. The policy must cover only qualified long-term care services, which include necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services required by a chronically ill individual. Only premiums paid for policies that strictly adhere to these criteria are eligible for tax consideration.
For S corporation owner-employees who own more than 2% of the company’s stock, the tax treatment of long-term care insurance premiums differs from that of other employees. These “2% shareholders” are treated similarly to partners in a partnership for purposes of health insurance deductions. When an S corporation pays for a qualified long-term care insurance contract on behalf of a 2% shareholder, the premium amounts are considered additional W-2 wages to that shareholder.
The premium payments are included in Box 1 of the shareholder’s Form W-2, increasing their taxable income. The shareholder then has the opportunity to deduct these premiums as a self-employed health insurance deduction on their personal income tax return, specifically on Schedule 1 of Form 1040. This deduction is taken “above-the-line,” meaning it reduces their adjusted gross income (AGI) directly, which can be beneficial. Unlike other medical expense deductions, the self-employed health insurance deduction for qualified long-term care premiums is not subject to the 7.5% adjusted gross income threshold that applies to general medical expense deductions.
However, the amount of long-term care premiums that a 2% shareholder can deduct is subject to age-based limitations set annually by the IRS, as specified under IRC Section 213. For the 2025 tax year, these limits are: $480 for individuals aged 40 or less; $900 for those more than 40 but not more than 50; $1,800 for those more than 50 but not more than 60; $4,810 for those more than 60 but not more than 70; and $6,020 for individuals more than 70 years old. These limits apply to the portion of the premium that can be treated as a medical expense.
When an S corporation pays for qualified long-term care insurance for its non-owner employees, those who own 2% or less of the company’s stock, the tax implications are generally more straightforward. The premiums paid by the S corporation are typically considered a deductible business expense for the corporation itself. This means the S corporation can reduce its taxable income by the amount of the premiums paid.
For the non-owner employee, these premium payments are generally excludable from their gross income. This treatment is similar to how other employer-provided health benefits are handled, offering a tax-free benefit to the employee. Furthermore, the age-based limitations on deductible premium amounts that apply to owner-employees do not apply when the S corporation pays for long-term care insurance for its non-owner employees. The full premium amount paid by the corporation for these employees is typically deductible by the business and excluded from the employee’s income.
Understanding where and how long-term care insurance premiums are reported on tax forms is essential for compliance. For 2% S corporation owner-employees, the S corporation reports the premiums paid on the shareholder’s Form W-2. These amounts are typically included in Box 1 (Wages, tips, other compensation) and may also be reported in Box 14 for informational purposes, indicating they are long-term care insurance premiums. The shareholder then claims the self-employed health insurance deduction for these amounts on Schedule 1 of their personal income tax return, Form 1040. The S corporation itself does not deduct these premiums as a health insurance expense for the owner on its Form 1120-S, as they are treated as part of the owner’s compensation.
For non-owner employees, the S corporation deducts the premiums paid as a business expense directly on its Form 1120-S, the U.S. Income Tax Return for an S Corporation. These amounts are generally not reported as taxable income on the employee’s Form W-2, reflecting their excludable nature. Should an individual, whether an owner or non-owner, pay for a qualified long-term care policy personally, they might be able to include these premiums as a medical expense deduction. This deduction would be claimed on Schedule A (Itemized Deductions) of Form 1040, subject to the adjusted gross income threshold of 7.5% and the age-based premium limits previously discussed.